Airport Memories

Bulldog Burrito - 0 stars
320 Elm St., New Haven, CT

Cosi - 1 star
338 Elm St., New Haven, CT

Au Bon Pain - 1 star
1 Broadway, New Haven, CT

It's been over a month since I ate in an airport, but that doesn't mean I haven't been able to eat national-chain airport food. Loyal readers will know that one of the most dependable airport staples is the highly Americanized burrito place, and there's one just two blocks from the law school. Bulldog Burrito would fit in quite well in an airport, with its "cilantro lime" (read: white) rice and generally bland fare. Across the street is Cosi, one of my favorite sandwich places back when I lived in New York and a standout of National Airport in DC. Unfortunately, it's not as good when you're a vegetarian; the Greek salad was mostly lettuce, and the lentil soup tasted like it came out of a can (a high-end, organic can like Amy's, but still a can). Finally, the neighborhood also boasts an Au Bon Pain, the cafe I used to go to on Harvard Square when I didn't feel the need to be pretentious and go to Pamplona (I think that's what it was called). Au Bon Pain is my preferred lunch spot in Logan, Pittsburgh, and Philadelphia, because you can get a custom-made sandwich on a decent baguette, and it didn't disappoint here either.

Au Bon Pain is also where I spent Tuesday evening, finalizing the FT op-ed that I mentioned in my previous post. My co-author (and brother-in-law) Simon and I also decided to launch a blog, The Baseline Scenario, dedicated to global economic issues and, for the short term, to the current financial crisis. If you're at all interested in the most profound economic crisis this country has faced since the Great Depression, I encourage you to check it out.

As a result, I may be posting less often to this blog, but I'll try to make it at least once a week. (And I know, I still have to write about Sally's and Pepe's.)

You Want to Work Where?

Jasmine - 1 star
Church and Grove Streets, New Haven, CT

There is a chill in the air, but it's still warm enough to get out of the law school for lunch, so I went to Jasmine, a Thai pushcart on the streets of New Haven a few blocks away. It's cheap, convenient, and filling. I got "drunken noodles" - rice noodles (I think) with that basil-soy flavor common to Thai food - and a mango curry with vegetables and tofu. The curry was a not as spicy as I would have liked, but overall it was pretty good and definitely worth $5.

I was eating with a 3L whom I met a year and a half ago when I was deciding whether or not to go to law school. Ironically enough, we were meeting because he is thinking of working at McKinsey and wanted my advice. McKinsey is interviewing YLS students this week for summer associate and real associate jobs, and a surprisingly high number of people seem to be interested. I guess I can understand that; I haven't been a corporate lawyer, but between the two working at a big law firm sounds equally dehumanizing, less interesting, and more career-limiting. And I certainly can't criticize anyone for wanting to make some money.

On the subject of money, and at the risk of blowing my what's left of my anonymity, my brother-in-law and I wrote two op-ed articles on the financial crisis this week. One was published in the print edition of the Washington Post on Tuesday, and the other only in the online edition of the Financial Times on Wednesday. Enjoy.

Historian Makes Good

I know a celebrity!

At What Price?

I'm forgoing the usual restaurant review because there is a pressing question I want to raise about the mother of all bailouts, announced at $800 billion but almost certainly going to cost far more than that: what's the price? It's a question passed over almost entirely by the financial journalists, who are proving that they know no more (and probably a good deal less) about the financial markets than they know about their favorite baseball teams. So far they have repeated breathlessly that Treasury is asking for $800 billion of your and my money to buy mortgage-backed securities from banks, and that this will prevent the financial system from collapsing. But what price will they pay?

In my previous posts, I told the story of how poor lending practices led to mortgage-backed securities which led to major investment banks going bankrupt. The situation today is something like this (the numbers are obviously illustrative, but they reflect the basic facts). Some big bank has $190 in loans and "$200" in assets, which means it has $10 in capital. Of those "$200" in assets, $140 is in "normal" assets that are considered reasonably safe, and "$60" is in mortgage-backed securities. I say "$60" because there is virtually no market for mortgage-backed securities, so the bank is guessing (hoping?) that they are worth $60. Originally those securities were worth $100, but they've already been written down multiple times to $60. However, if the bank absolutely had to sell them on the market today, it would probably only get $20. (In July, Merrill Lynch - remember them? - sold $30 billion of mortgage-backed securities for 22 cents on the dollar.) The problem is that those $190 in loans are coming due, and no one is willing to roll over the loans or lend new money, because no one believes that the assets are really worth $200. And without new loans, the bank will go bankrupt. Since we don't know exactly what is on each bank's balance sheet, we can only assume that many, many big banks are in this situation.

Paulson is asking for $800 billion dollars to create a giant hedge fund, owned by the government, that will buy these illiquid mortgage-backed securities. The idea is that by getting them off the books of the banks, investors and the general public can have confidence that the banks won't go out of business and that the financial system won't collapse. But everything hinges on the price that this hedge fund will pay for those securities, because that's where your $800 billion are going.

We know that the government isn't going to pay market price ($20), because (a) the banks could sell the securities for $20 today without any government intervention, and (b) if they only got $20 they would go bankrupt, because then their assets would be less than their liabilities. In fact, the whole plan only works if the government pays enough to keep these banks solvent. But if the government pays whatever the banks think the securities are worth, then $60 of your money is being exchanged for "$60" worth of mortage-backed securities - which, according to the free market (remember that?) are only worth $20. So we all lose $40, and the bank gains $40; it's a handout, pure and simple.

There is only one scenario under which everything works out. There are some people who believe that, if held to maturity (basically, if you hold onto the security and see how many people actually pay their mortgages), it will turn out to be worth $60; the fact that no (sane) person would pay $60 for it today is just a result of irrational panic. If that is in fact the case, then the banks will get bailed out, and we the taxpayers will not lose money. Of course, this is predicated on the belief that markets are not efficient; if they are (which free market advocates would have us belief), then $20 really is what they are worth.

So of that $800 billion, we will get some fraction back, but most is disappearing into the pockets of the banks. Now, we are told that this is necessary to avert a complete meltdown of the financial system and the economy. But are there ways we could have accomplished this objective without taking $800 billion of our money and handing it to a hedge fund created by a former head of Goldman Sachs and undoubtedly staffed by investment bankers, whose purpose is to overpay banks for their bad investments?

Well, think about this. Even after the government buys those mortgage-backed securities at artificially high prices, the banks that have just gotten bailed out will still be able to foreclose on the homeowners at the beginning of the chain, because that $800 billion is just going to the banks, not to anyone else. And this will create another wave of social costs that the taxpayers will have to pick up. What if, instead, we used the $800 billion to help homeowners pay off their loans instead of defaulting? In addition to helping the homeowners, that would also help the banks, because that $800 billion of cash would increase the number of mortgages that get paid off, thereby increasing the value of all those mortgage-backed securities that all those banks are holding. The difference? In one case all the benefit goes to the banks, in the other it is shared between ordinary homeowners and the banks.

At the end of the day, Paulson's plan could be the largest and most egregious example of self-dealing in the history of the American financial system, under cover of a legitimate emergency - which should come as no surprise from an Administration whose modus operandi has been using the levers of power to enrich the already rich.

Sub-prime crisis, continued

Indian cart, the U.N. - 1 star
Prospect St., New Haven, CT

New Haven is currently enjoying its beautiful two-week season of early fall, with crystal-clear skies and temperatures in the low 70s. So for lunch today, Kiel, Tommy, and I took a stroll up Prospect St. to the School of Management, Yale's idiosyncratically-named business school. The object of our quest was an array of pushcart vendors outside the SOM. There are a Thai cart, an Indian cart, a Japanese cart, a Mexican cart, a Middle Eastern cart, and probably others I've forgotten. In Berkeley, there's a food court on Durant that my friend Nancy dubbed the U.N., because all of the developing world countries were represented (there was an Afghan place that I particularly liked), so I'm going to call this place the U.N., too.

You can get a rice plate with up to four things on top, for just $4.50 (vegetarian, at least); I had channa masala (chickpeas), which was pretty bland, and a good spicy potato dish, as well as a samosa. Kiel also got Indian, including a big, chewy piece of naan, and Tommy got Thai noodles. We sat on the patio of the SOM and talked about capitalism. Ah, to be young again.

Today in procedure class, while the conflagration in the financial system continued to swirl around all of us, we learned about the distinction between personal jurisdiction and venue. In short, if you are a citizen of Connecticut who was harmed by an operation performed in New York by a doctor who lives in New York, and you sue him in federal court in Connecticut, that court will probably have personal jurisdiction (depending on the extent of that doctor's connections to Connecticut) but will not have venue; but if instead you sue the hospital where you got the operation, you will almost certainly have personal jurisdiction and you will have venue. At the end, the professor said there was no coherent theory that could explain that difference, and we just moved on.

One other person in my small group independently noted that there is a stunning silence at Yale over this week's events, which people will be studying for the next hundred years. I don't have any particuar insights, but I thought I would take a stab at explaining some of the mechanics that are usually glossed over in the newspapers, either because the financial reporters take them for granted, or (more often) because the financial reporters don't understand them.

Last time I wrapped things up by talking about how high leverage can cause banks to have negative capital even if there's only a moderate fall in the value of their assets. That's basically what happened to Lehman Brothers; their assets were over 30 times their capital, meaning just a 3% fall would have wiped them out, and no one believed their assets were properly valued anyway, meaning most people thought they were already underwater. In that situation, no one wanted to do business with them, and if you are an investment bank and no one will loan you money, you are dead. (Lehman had liabilities of over $600 billion to support all those assets; as the loans came due, no one was willing to roll them over or make new loans to Lehman, so they were about to simply run out of cash.)

AIG was a bit more complicated. Like Lehman, AIG was highly leveraged and owned big piles of securities that were plummeting in value. In addition to mortgage-backed securities, AIG in particular was engaged in perhaps hundreds of billions of dollars worth of credit-default swaps; under the terms of these swaps, AIG was essentially insuring payment on bonds, including mortgage-backed securities. So as those mortgage-backed securities became more and more risky (see the earlier post), the chances that AIG would have to pay out on insurance claims went up, and the value of their swap holdings plummeted. So they were stuck with real debts on the one hand, and on the other hand they had a pile of assets that were falling in value and that no one wanted to buy, and it looked like they were going to run out of cash this week, because no one wanted to lend them money. In particular, as they looked more and more risky, the ratings agencies lowered their ratings for AIG; and the way loans to big companies are often structured, if the ratings fall past a certain point, the company has to "put up more collateral," which means they have to pledge more cash or assets to the lenders. (It's as if, as the price of your house falls, your bank says that you need to pledge another house to secure your mortgage ... but you don't have another house.) In this case, ratings downgrades on Monday forced AIG to come up with over $13 billion in cash or collateral, and they just didn't have it.

On Friday AIG was asking for a $20 billion loan, but by Sunday it was $40 billion, by Monday it was $75 billion, and by Tuesday the eventual federal bailout was $85 billion. This is a very worrying sign; it probably means that according to AIG's books they needed $20 billion, but when the other investment bankers looked at the actual securities holdings and swap positions they decided they were worth a lot less than AIG had assumed they were worth, and hence the need for more cash. The problem is that many people are now assuming that every bank has similarly optimistic assumptions about its assets, and if that's true then we are in big trouble.

There is some talk that the government will get its $85 billion back, at 12% interest, and this is certainly possible. But it rests on the assumption that AIG's assets are somehow worth more than the investment bankers think they are, and that once the market settles down they will be able to sell those assets at a better price. If they could get that price now, they would just sell them and they wouldn't need a loan. So the government is betting that prices of these assets, colloquially known as "toxic waste," will go up. After the last twelve months, I wouldn't bet on it.

Yale Law School of Pizza

Est Est Est - 1 star
1176 Chapel St., New Haven, CT

Bella Haven - 0 stars
240 College St., New Haven, CT

Typical YLS organization meeting - 0 stars

New Haven is justly known for having some of the world's best pizza; of all the places I've been, including Boston, New York, and California, I would say that only Naples has generally better pizza. And when you go to Yale Law School, you end up eating a lot of pizza.

However, after three weeks, I have yet to go to Sally's or Pepe's, the two most famous New Haven pizzerias (although I've been to both in the past - I think Sally's is slightly better, but Pepe's is much more convenient in many ways). YLS is known for providing lots of free food to students, and most of that free food comes in the form of meetings held by organizations, student groups, reading groups, and so on, and they all provide pizza as an incentive to attend. For example, yesterday the Schell Center for Human Rights had a meeting, this evening there is a student organization fair and then a meeting of all of the journals, tomorrow I'm sure there's pizza but I'm going home to see my family, and Thursday there is a training session for the Temporary Restraining Order project that I may attend.

Unfortunately, and undoubtedly for cost reasons, the pizza at these events is not that good. Although it would probably get one star elsewhere in the country just for getting the basic formula right - a crust that is slightly blackened, flexible enough to fold, yet strong enough to hold the toppings; fruity, bright red tomato sauce; a reasonably high sauce-to-cheese ratio; and mozzarella cheese (believe it or not, in California some ordinary pizzerias have streaks of yellow cheddar cheese on their pizzas) - by New Haven standards YLS pizza counts as marginally passable. The downtown pizza-by-the-slice places not that much better. I tried Bella Haven because it has the unique advantage of being across the street from my apartment, but it seemed like I might have been anywhere in the Northeast; Est Est Est would probably count as one of the better pizza places in almost anywhere in the country, but is nothing special for these parts.

All the free pizza contributes to another feature of Yale Law School: the isolation. As a 1L, you spend basically your whole day shuttling around a single small building with largely the same people, going to 18 hours of classes per week and several hours more of lectures and meetings. In many ways it's a wonderful thing, and a huge advantage of going to a small school. At other times, it's easy to forget that the outside world exists. Yesterday, in perhaps the most tumultuous day in our financial system since 1929 (the markets fell more in 1987 and 2001, but neither time was there the structural turmoil we had yesterday), I didn't hear a single word about what was going on, except one professor's oblique reference to Merrill Lynch that half the class probably missed. Today, the markets just opened 2% down, the world's largest insurance company is about to go bankrupt unless it gets a $75 billion loan in the next few hours from a banking sector that has no capacity left to make loans (according to my torts professor, "insurance makes the world go round," which I also believe), and not a tremor troubles the calm of the Yale Law School.

Another September 11th

Thali Too - 2 stars
65 Broadway, New Haven, CT

One of the best things about Yale Law School (one shared, I'm sure, with many other law schools) is small group. (This is not the best thing about Yale; the best thing is that there are no grades for required classes, and everyone passes. But I digress.) In the first semester, you take one of your classes in a group of about 14 people (mine has 14), and all of your other classes (which have 40-60 people) include those same people. This being a touchy-feely school, this becomes an exercise in mutual support and admiration.

Today, my small group went out for lunch to celebrate completing our first week of law school. We went to Thali Too, which has the advantages of being close to the law school and being entirely vegetarian (my small group has at least four vegetarians, at least five if you count people who don't eat land animals, and at least one ex-vegetarian). It is a slightly Americanized pan-Indian restaurant, meaning that it has both northern Indian food (the kind you've probably had) and southern Indian food (the kind you probably haven't had). I had a veggie utthapam, which is something I had previously only found at one southern Indian restaurant in California, a kind of soft pancake with assorted sauces, and hot masala fries. They also make all the vegetarian Indian standards, plus lots of things I would love to try. I'm not sure the food deserves 2 stars, but it was fun and we got to try a lot of different things.


Most of the people in my small group are, well, young, but, this being Yale Law School, they can be shockingly accomplished. After lunch, Valarie went down to New York to attend a screening of her documentary film, Divided We Fall, which she began shooting as a college student after the first September 11th. The film, which documents hate violence in the aftermath of 9/11, has won piles of awards around the world, is being shown in 70 different cities around the country this month, and will be released on DVD later this year. And last night, before her big day, Valarie was preparing ... by staying up past 1 am (I know this because she sent out an email) doing her reading for contracts ... and she got cold-called in class this morning, where she acquitted herself gracefully. (The case had to do with whether a verbal agreement by a husband to pay his wife 30 pounds a month was intended to have legal consequences and was, therefore, an enforceable contract.) Not bad for a day's work.

Back in the Ivory Tower

Copper Kitchen - 2 stars
1008 Chapel St., New Haven, CT

In the mid-1990s, my girlfriend (not the woman I ended up marrying) went to art school at Yale. (Little-known fact: Yale has one of the best art schools, and perhaps the most prestigious one, in the country. Its music school is pretty good, too.) She is known in some circles for having painted an obscene painting about a Yale art school professor - while she was still a student. I don't remember much about those years - and I only spent about 6 weeks in New Haven, anyway - but one of our favorite places to eat was the Copper Kitchen, which is an old-school diner. It is old-school in two ways: first, it doesn't have fake-50s decor, like most diners in most parts of the country; and second, it doesn't have a 20-page menu with every dish you could possibly imagine. Back then, you could get two eggs, home fries, toast, and coffee for $2.85; today, it costs $4.00, making it still one of the best bargains anywhere. It's also right around the corner from my apartment, so I ate lunch there one of my first days here for school. I had an egg and cheese sandwich with fried onions on a hard roll (something I grew up with, but that I haven't seen outside the Northeast), which was perfect, and a Greek salad, which was passable (like virtually all Greek salads you see, it was at least 50% lettuce, which is a bit anomalous).

I came to Yale because it seemed like the friendliest, nicest law school around (OK, given my geographic location, the only one I was comparing it to was Harvard), and so far it hasn't disappointed. We had four days of orientation, the lessons of which can be summed up as follows:

• Be nice to each other
• Remember why you came to law school
• Help each other
  
• It's more important to do something you believe in than to make money
• All your first-term classes are pass/fail, and everyone passes, so don't worry about it
• Find out who you are as a person and what you stand for
  
• Love each other
  

I've heard some people grumbling about how touch-feely everything is, but I think it's all great. Maybe it's my age. I do believe it's important to know who you are, feel comfortable with yourself, and treat other people well.

In the words of the great philosopher Anna Kournikova, "Why are people afraid of getting older? You feel wiser. You feel more mature. You feel like you know yourself better. You would trade that for softer skin? Not me!" What that quotation has to do with the rest of this post is left as an exercise for the reader.

This is the view from my New Haven apartment. Nice, no?